When Fear Runs Rampant!

Are you feeling fearful about the economic mess we’re in? You’re not alone. Vikas Bajaj writes in the NY Times about how fear spreads like wildfire and it’s becoming a case study in psychology [with lessons to be learned for word of mouth marketing].

Fear can be seen at every turn. Fear is an immensely powerful force, perhaps more so than greed, said Andrew W. Lo, a professor at the Massachusetts Institute of Technology who has studied investor behavior.

Scientists who have studied the brain function have found that the amygdala, the part of the brain that controls fear, responds faster than the parts of the brain that handle cognitive functions, he said.

“Fear is a much stronger motivational force,” Mr. Lo added. “The loss of $1,000 has a much bigger impact than the gain of a $1,000.”

He cites a series of groundbreaking experiments in the 1970s by psychologists Daniel Kahneman and Amos Tversky. In one test, they asked students to choose between a sure bet of $3,000, or an 80 percent chance of winning $4,000 (meaning there was a 20 percent chance of winning nothing). Most students said they would take the $3,000.

That perhaps explains why investors are willing to earn virtually no return in Treasury bills just to be assured that they will get their money back.

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